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Interpreting Unilateral Contracts in the Insurance Industry

Reading Time 6 minute read

South African courts consider several factors when determining the enforceability of a contractual provision in an insurance policy or contract.

  • The essential elements of a contract are considered - whether ‘real consensus’ between the parties exists, whereby parties have expressed an intention to be bound by certain obligations.
  • The courts also consider contractual principles. Important contractual principles such as pacta sunt servanda and caveat subscriptor denote the importance of sanctity of contract and the binding nature of contractual obligations, whether the insured party has read the policy or not.
  • Importantly, courts also apply rules of interpretation of contract, a field which has undergone significant changes in the last decade.

In this article we look at how the changes to the rules relating to contractual interpretation have impacted on the way in which unclear or uncertain terms of an insurance policy might be interpreted by our courts.

Interpreting Interpretation

The traditional approach to interpretation of a contract was to ascertain the common intention of the parties. The provision was to be given its ordinary grammatical meaning, unless this would result in some absurdity or inconsistency with the remainder of the contract.

The watershed judgment of Judge Wallis in Joint Natal Municipal Pension Fund v Endumeni Municipality 2012 4 SA 593 (SCA) (‘Endumeni’) heralded a “new approach” to contractual interpretation.

In the words of Judge Wallis, under the new approach:

consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production”.

The new approach has been endorsed in several subsequent judgments, where it has been held that interpretation no longer occurs in stages but instead is ‘one unitary exercise’, where judges consider the context and purpose of the provision in conjunction with its ordinary meaning. Adopting this approach, courts can look beyond the ordinary grammatical meaning of a word or provision and instead enquire into its context and the surrounding circumstances of it inclusion.

But what of standard form contracts where the context and surrounding circumstances are not uniquely applicable to each contracting party? Is there a “new approach” to the interpretation of this form of contract?

Standard Form Contracts in Insurance

From insurance policies to broker contracts to placing slips, standard form contracts are a distinctive feature of the insurance industry. Standard form contracts create legal relationships between insurers, intermediaries and insureds, and the terms governing the contracts regulate the obligations between the parties. The contracts are characterised by boilerplate terms and the absence of fact-specific clauses. As stated by Judge Sachs in his minority judgment in Barkhuizen v Napier, standard form contracts have standard effects.

Standard form contracts have several advantages – they are cost effective, time efficient and ensure a level of certainty and uniformity between insurance contracts of a similar nature. In the digital age, standard form contracts are automatically populated with user input and deliver almost-instant insurance via mobile applications.

One of the biggest criticisms levelled against the use of standard form contracts is that the contract is ‘one-sided’ or unilateral, and results in the insurer wielding disproportionate power to impose unreciprocated obligations on the insured. Standard form contracts also present a unique set of interpretation challenges to judges.

Standard Form Contracts and Interpretation

The new approach to interpretation does not appear to lend itself to interpretation of a standard form contract. While grammatical meaning and syntax may be considered, ascertaining the context, the apparent purpose to which the provision is directed and the material known to those responsible for its production is difficult, if not impossible.

In an effort to overcome the inherent difficulties associated with the interpretation of standard form contracts, our courts have developed a set of interpretation rules to act as a guide. These rules include –

  • considering the provision in the context of the contract;
  • determining whether, in the context of the entire contract, a clause is unreasonable or does not constitute fair dealing in a commercial transaction; and
  • holding that terms which do not form part of the ‘real consensus’ between parties and which were not brought to the attention of a signatory will not be enforceable.

Principles relating to public policy must also be satisfied. If the provision is contrary to public policy, it cannot be enforced.

Alignment of Policies

In the absence of clear interpretational norms and guidelines, courts may turn to external sources to consider the enforceability of standard form insurance contracts. Various sources are relevant to this enquiry and insurers utilising standard form contracts should endeavor to incorporate principles emanating from these sources into their policies and contracts:

  • Consumer Protection Act, 68 of 2008 (“CPA”): The CPA was promulgated to promote fair business practices and contains the right to fair, just and reasonable terms and conditions. The CPA does not apply to transactions involving the State or to instances where the consumer is a juristic person whose asset value or annual turnover equals or exceeds R2 million. As the CPA’s application is restricted, many insured parties will fall out of the purview of the CPA.
  • Policyholder Protection Rules (“PPRs”): The PPRs were issued in terms of the Short-term Insurance Act, 53 of 1998, and the Long-term Insurance Act, 52 of 1998, to ensure that insurance policies are entered into, executed and enforced in accordance with sound insurance principles in the interests of the parties and in the public interest. These rules govern the content of insurance policies, the language of policies and the provision of information to policyholders regarding policies. The PPRs apply to policies where the policyholder is a natural person or is a juristic person whose asset value or annual turnover equals or exceeds R2 million, and do not apply to reinsurance policies.
  • Treating Customers Fairly (“TCF”): The Financial Sector Conduct Authority established a regulatory framework to govern the treatment of clients of financial service providers. Insurers and intermediaries are required to demonstrate the six TCF Outcomes to ensure that insured parties are treated fairly. TCF Outcomes relevant to the conclusion of insurance policies include the provision of clear information and suitable advice by insurers, service of an acceptable standard and the absence of unreasonable post-sale barriers (such as barriers to claims or complaints).
  • Conduct of Financial Institutions Bill: Published for comment in 2018, the Bill promises to provide for the establishment of a consolidated regulatory framework to promote the fair treatment and protection of customers by financial institutions. The TCF Outcomes are reflected in the current draft Bill and insurers can expect strengthened protective measures for insured parties when the Act comes into operation.

Once the Conduct of Financial Institutions Bill is enacted, insurers will be required to comply with its provisions. Insurers are encouraged to review their policies, especially standard form contracts, to ensure that their policies are aligned with the CPA, the PPRs, the TCF Outcomes and, in time, the Conduct of Financial Institutions Bill.

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